[1] The meaning of “in cases where there are errors in connection with more than two business years,” which are exceptional grounds for re-audit under Article 81-4(2)3 of the former Framework Act on National Taxes, and the principle of “in cases where there are errors in connection with more than two business years,” and the principle of “in cases where there are errors in or omissions in the calculation of tax base and amount of tax due to any act not completed,” and whether a follow-up measure that is embodied in more than two business years, constitutes such a case (affirmative)

[2] In a case where Company A paid performance bonus to Company B by determining specific amount at a general meeting of shareholders, board of directors, etc. held for each pertinent business year, based on the resolution of board of directors to pay performance bonus within 10% of rental income each year to Party B who was in the position of the owner of start-up and the principal of the board of directors, the case holding that the case holding that “it constitutes a case where there were errors related to two or more taxable periods” under Article 81-4(2)3

[1] Article 81-4(1) of the former Framework Act on National Taxes (amended by Act No. 11604, Jan. 1, 2013; hereinafter the same) provides that a tax investigation shall be conducted within the minimum scope necessary to ensure appropriate and fair taxation. Paragraph (2) of the same Article prohibits re-audit in principle as it seriously infringes on taxpayers’ freedom of business and legal stability, and may lead to abuse of their authority to conduct re-audit. In light of the language, structure, and legislative intent of the relevant provisions, “where there are errors in connection with two or more business years”, which are the exceptional reasons for re-audit as stipulated in Article 81-4(2)3 of the former Framework Act on National Taxes, constitutes an exceptional case where a single act of re-audit occurred during two or more business years from the date of commencement of re-audit, and thus, such an act of re-audit in light of the same type of grounds for non-audit, which is the same as that of the former Framework Act on National Taxes, constitutes an act of omission or omission in the same business year.

[2] Where Company A paid performance bonuses to Company B by determining specific amounts at the shareholders’ meeting and the board of directors, etc. held every five years based on the resolution of board of directors to pay performance bonuses within 10% of rental income each year to Company B, the case holding that the above resolution of board of directors constitutes “in cases where there exist two or more taxable periods” as stipulated in Article 81-4(2)3 of the former Framework Act on National Taxes (amended by Act No. 11604, Jan. 1, 2013) in light of the contents and the period before and after the above resolution of board of directors: (a) the amount of performance bonuses, etc. is determined by the shareholders’ meeting and the board of directors which held each business year; and (b) the specific amount of performance bonuses, etc. is determined by the resolution of board of directors to pay performance bonuses; and (c) it constitutes “in cases where there exist two or more taxable periods” without any particular payment criteria.

[1] Article 81-4(1) and (2)3 of the former Framework Act on National Taxes (Amended by Act No. 11604, Jan. 1, 2013) / [2] Article 81-4(2)3 of the former Framework Act on National Taxes (Amended by Act No. 11604, Jan. 1, 2013)

[Defendant-Appellant] Plaintiff 1 and 3 others (Attorney Ahn Byung-hee, Counsel for defendant-appellant)

The director of the tax office.

Seoul High Court Decision 2013Nu23852 decided April 9, 2014

The part of the lower judgment against the Defendant is reversed, and that part of the case is remanded to the Seoul High Court.

The grounds of appeal are examined.

1. Article 81-4(1) of the former Framework Act on National Taxes (amended by Act No. 11604, Jan. 1, 2013; hereinafter the same) provides that “tax officials shall conduct a tax investigation to the minimum extent necessary to realize proper and fair taxation, and shall not abuse their right of investigation for any other purpose, etc.” (Article 81-4(2) provides that “tax officials shall not conduct a re-investigation into the same item of taxation and the same taxable period unless they fall under any of the following subparagraphs, unless they fall under any of the following subparagraphs,” and subparagraph 3 provides that “in cases where re-audit is exceptionally permitted in relation to two or more business years,” one of the cases where re-audit

Article 81-4(1) of the former Framework Act on National Taxes provides that a tax investigation shall be conducted within the minimum extent necessary for appropriate and fair taxation. Paragraph (2) of the same Article provides that a taxpayer’s freedom of business and legal stability may be seriously infringed, as well as that of abuse of the right to conduct a tax investigation. In principle, a re-audit may be conducted in exceptional cases where there is considerable violation of the principle of fair taxation. In light of the language, structure, legislative intent, etc. of the relevant provisions, “where there are errors related to two or more business years” under Article 81-4(2)3 of the former Framework Act on National Taxes, which is an exceptional reason for re-audit, means cases where an error or omission in the calculation of the tax base and amount of tax has occurred over two or more business years, and thus, it is reasonable to interpret that such an act constitutes an exceptional reason for re-audit conducted within the same business year as discovered in another business year, and thus, it cannot be deemed that such act constitutes an unlawful one of the two or more business years following the commencement of re-audit, even if there is an error or omission.

2. A. According to the reasoning of the lower judgment, the lower court acknowledged the following facts by comprehensively taking account of the adopted evidence.

(1) From 2006 to 2010, the Plaintiff paid each of the KRW 900 million, KRW 1.5 billion, KRW 1.8 billion, KRW 1.9 billion, and KRW 1.9 billion (hereinafter collectively referred to as “the instant performance bonus”) to the Nonparty, whose registered director and the president of the board of directors held 38.10% of the Plaintiff’s shares as a performance bonus.

(2) From July 14, 2008 to August 8, 2008, the director of the Seoul Regional Tax Office conducted an integrated investigation of corporate entrepreneurs (hereinafter “first tax investigation”) against the Plaintiff for the business year 2005 from July 14, 2008 to August 8, 2008. According to the “documents requesting tax investigation” prepared by the Plaintiff, the meeting minutes of the board of directors and the rules on the performance of officers from 2005 to 2008 are stated as being submitted.

(3) After August 4, 2008, the director of the Seoul Regional Tax Office notified the Plaintiff of the result of the first tax investigation with respect to which corporate tax items were recovered in the business year 2003 or 2007, but did not take any particular measures regarding the performance bonus paid to the Nonparty.

(4) On November 8, 201, the director of the Seoul Regional Tax Office commenced the consolidated investigation of corporate tax for the Plaintiff in the business year of 2007 through 2010. On February 14, 2012, the director of the Seoul Regional Tax Office notified the Plaintiff of the extension of the scope of the investigation containing part of the business year of 2006 to the scope of the investigation, and commenced the partial investigation of corporate tax for the business year of 2006 (hereinafter “the secondary investigation”), among the tax investigation conducted as above, the part of the investigation of the performance bonus paid to the Nonparty out of the tax investigation for each business year of 2006 and 207.

(5) On March 14, 2012, the director of the Seoul Regional Tax Office notified the Plaintiff of the investigation result that each performance bonus of the instant case was disposed of of surplus funds that were paid without the payment standard, and thus, cannot be included in deductible expenses. Accordingly, the Defendant adjusted corporate tax for the business year of 2006 to 2010, based on the result of the investigation, such as non-Inclusion of the performance bonus of the instant case in deductible expenses, etc.

B. Next, the lower court determined that the second tax investigation constituted a reinvestigation in view of the following: (a) the first tax investigation already submitted the list of shareholders, etc. after the business year 2003; (b) the Plaintiff’s “documents requesting the tax audit team” contained the minutes of the board of directors from 2005 to 2008 regarding the remuneration for executive officers in relation to the submission of the minutes of the board of directors; and (c) the Plaintiff’s corporate tax item was recovered from the first tax investigation; and (d) the second tax investigation conducted the second tax investigation for the business year 2006 and the entire tax investigation for the business year 2007.

In addition, the lower court rejected the Defendant’s assertion that: (a) on November 8, 2005, the Plaintiff’s board of directors made a resolution that “if net income at the time occurs, performance bonuses shall be paid to the Nonparty within 10% of the department store and hotel rental income, and the time and amount thereof shall be determined annually by the board of directors; (b) it is difficult to deem the Nonparty to have made a decision on the specific amount of performance bonuses to be paid each year to the Nonparty; (c) each performance bonus paid to the Nonparty during each business year in 2006 and 207 was paid to the Nonparty; and (d) in light of the fact that the Plaintiff’s general meeting of shareholders and the board of directors held in each business year and the number of specific payments was determined.”

3. A. The Defendant’s ground of appeal that the second tax investigation does not constitute reinvestigations is nothing more than an error of selecting evidence or fact-finding which belongs to the exclusive authority of the lower court as a fact-finding court, and thus cannot be a legitimate ground of appeal. Furthermore, even if examining the lower court’s decision in light of the records, it did not err by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules, contrary to what is alleged

B. However, the lower court’s determination that the second tax investigation was illegal on the following grounds that it was not permissible exceptionally.

According to the reasoning of the judgment below and evidence duly adopted by the court below, (1) most of the shares issued by the plaintiff as a corporation operating real estate rental business, etc. were owned by the non-party, and (2) since 2006 to 2010, 300,000,000 won were sold to the non-party, and (3) since 200,000,000 won, 200,000,000 won, 30,000,000,000,000 won and 30,000,000,000,000 won and 30,000,000,000 won and 20,000,000,000 won and 30,000,000,000 won and 1,000,000,000 won and 20,000,00 won.

Examining these facts in light of the legal principles as seen earlier, the Plaintiff’s payment of performance bonus in each business year from 2006 to 2010 is based on the resolution of the board of directors on November 8, 2005 that the Nonparty, who held the position of the Plaintiff’s owner of start-up and the head of the board of directors, paid the bonus within the limit of 10% of the annual rent revenue. In light of the content and the progress of the resolution of the board of directors, it can be deemed that the Plaintiff paid dividends for disposal of surplus funds to the Nonparty each year without any particular payment standard, and it can be deemed that the Nonparty would have the form of bonus subject to inclusion in deductible expenses only in the name of the Nonparty. Although the specific performance bonus amount, etc. to be paid to the Nonparty was determined at the general meeting of shareholders and the board of directors, etc. held in each business year, it is reasonable to deem that the payment of performance bonus in this case constitutes an exceptional re-audit under Article 81-4 of the former Framework Act on National Taxes.

C. Therefore, the court below should have deliberated on whether the head of Seoul Regional Tax Office commenced the secondary tax investigation based on specific data that can support the above situation without any exceptional reasons, and determined whether the secondary tax investigation was illegal after examining whether or not the secondary tax investigation was commenced without any exceptional reasons. Nevertheless, the court below determined that the secondary tax investigation does not constitute an exceptionally permissible reinvestigation based solely on the circumstances in its reasoning and that the subsequent tax disposition was illegal. In so determining, the court below erred by misapprehending the legal principles on the interpretation of "where there were errors related to two or more business years" under Article 81-4 (2) 3 of the former Framework Act on National Taxes, thereby failing to exhaust all necessary deliberations, which affected the conclusion of the judgment. The defendant's ground of appeal pointing this out is with merit.

4. Therefore, the part of the judgment below against the defendant is reversed, and that part of the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Jo Hee-de (Presiding Justice)